I am actually getting to the point where I can barely bring myself to watch the ABC. If we are home, we will turn on The Drum but find that we increasingly turn it off. Ditto Insiders.
Anyway, we were watching this morning and we had Phil Coorey pretending he knew everything about the closure of Alcoa Point Henry and the supposed irrelevance of the carbon tax, noting in fact that Alcoa Australia as a group had been able to sell some of its free permits from last financial year (which is true).
(More generally, I am just amazed how ill-informed most journalists are. The primary sources are easy to access, but they seem to prefer to source their ‘information’ at the end of a phone line when the other party has a line to push. Work harder, I say, and let the phone ring off the hook.)
Here are the salient facts:
- Companies operate on future prospects, not the here and now. The fact that free permits were allocated last year is fine but the real kicker is what is the expected time path of the carbon price, the allocation of free permits and the price of electricity.
- Initially, aluminium smelting (along with a number of emissions-intensive activities) were allocated 94.5% of their emissions in free permits (note the amazing amount of compliance for the companies needed to achieve this).
- Each year after this, the number of free permits is ratchetted down by 1.3 per cent per year – to encourage energy efficiency. In compounding terms, this begins to hurt pretty quickly.
- The carbon tax was designed to increase each year until the ETS was implemented. Initially, there was to be a floor price of $15/tonne, but this was then dropped in favour of hitching our wagon to the European scheme (current prices <$10/tonne but who knows?) – talk about regulatory uncertainty.
- Note also the completely bizarre feature of a policy that was ostensibly designed to take us to a Clean Energy Future but involved trying to bribe the most emissions-intensive operations to hang around.
- To be sure, the Point Henry facility could only have survived with a massive investment upgrade. But given all of the above, there was no way that a board of directors could have signed off on the hundreds of millions that would have been required, particularly given the world price of aluminium.
- Actually, Alcoa is probably sufficiently large to affect the world price of aluminium through its actions of closing down down some operations. Unless Point Henry could have moved into the lowest cost quartile of production, it was a sitting duck for closure. All factors contributed to this outcome, including the important consideration of the forward price curve of electricity.
Just on another matter: The aluminium smelter in Bell Bay owned by Rio Tinto hangs on by a thread. It is hard to see how it makes money from it, but it is probably part of a larger corporate deal in which Rio’s aluminium assets (disaster, by the way) are packaged up and spun off. A previous attempt had to be aborted.
Had the AWU not come up with an accommodative package and dropped its ridiculous claim for parity of wages with mainland workers, Bell Bay may still have been closed. Unless there is significant investment in the facility in the future, put down Bell Bay’s prospects down as SHORT TERM.